THE PROCESS IN MOTION

How do you withdraw supply to hold the price?

Start the scene or choose a stage. The animation simplifies the mechanism; what follows gives the details and the available references.

▶ Play the process01A crop too good02The state buys to withdraw03Selling off without touching the exchange041931-1944: burning coffee

A crop too good

The coffee trees planted after 1888 come into production around 1896-1897, and the price collapses: Rio 7 falls to 7 cents a pound in 1897, around 5 cents in 1903. In 1906-1907, the world crop reaches 24,307,000 bags, of which 20,192,000 for Brazil alone: selling amounts to bringing down one's own price.

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1. A crop too goodThe coffee trees planted after 1888 come into production around 1896-1897, and the price collapses: Rio 7 falls to 7 cents a pound in 1897, around 5 cents in 1903. In 1906-1907, the world crop reaches 24,307,000 bags, of which 20,192,000 for Brazil alone: selling amounts to bringing down one's own price.
2. The state buys to withdrawThe State of São Paulo buys the crop from its planters, about one cent above the market, to take it off sale. It is bigger than expected: it buys nearly nine million bags and at the end of 1907 holds half of the world's visible stock. The price barely exceeds 6 cents.
3. Selling off without touching the exchangeA committee of seven green coffee traders and bankers, none of them Brazilian, sells off the stock “at prices that do not disturb the price of other coffees.” It refuses to deliver on the exchange, which would put the coffee back into the circuit that makes the price. The price doubles in two years: 13 cents at the end of 1911, 16 at the peak.
4. 1931-1944: burning coffeeAfter the crash of 1929, Brazil turns to destruction. From 1931 to 1944, the Departamento Nacional do Café, financed by a tax of 2.40 dollars per bag exported, burns or submerges 78.2 million bags: 12% of the annual stock in 1931, 70% in 1937. The word valorization has disappeared, the logic remains.

To remember: withdrawing supply holds the price as long as someone finances the stock, and a held price tells the planter to plant again.

In history: on May 18, 1912, Washington sues Sielcken and his associates for collusion; the complaint is dropped in May 1913, and the Norris Act bans any American participation in a future valorization.

Read the full article and its sources ↓

The mechanism that will govern the whole 20^th century of coffee is born of a crop that is too good.

Slavery ends in Brazil in 1888. A period of depreciated currency follows, which floods São Paulo with money in circulation and with immigrants, and therefore with new plantations. A coffee tree takes a few years to produce: those trees come into production around 1896-1897.

The market takes it badly. Rio 7 falls to 7 cents in October 1897, then to around 5 cents in 1903. European trading houses see their mortgages foreclosed.

And 1906-1907 is the year too many. The world crop reaches 24,307,000 bags, of which 20,192,000 for Brazil alone. At this level, selling amounts to making one's own price collapse.

The State of São Paulo then decides on something unprecedented: to buy the crop itself from its planters, about one cent above the market, to take it off sale. A law of 1905 provides for it, an agreement of 1906 with Minas Gerais and Rio de Janeiro widens it, and these two states abandon it almost at once. That leaves 75 million dollars to find.

The Rothschilds, bankers to Brazil for sixty years, refuse. Then every bank on the continent refuses in turn. It is at this point that the São Paulo commissioner takes the train to Baden-Baden.

Ukers 1922, ch. XXXV, pp. 804-806 (print); ch. XXXIII, p. 468

In August 1906, the São Paulo commissioner turns to one man: the green coffee trader Hermann Sielcken, born in Hamburg in 1847, arrived in the United States in 1869, partner of Crossman & Sielcken. He is resting at Baden-Baden.

Sielcken puts together a contract. A few large green coffee traders, including his former rivals Arbuckle Brothers, advance 80% of the value of two million bags, valued at 7 cents a pound for Rio No. 5.

Except that the crop is bigger than expected. The state has to buy nearly nine million. At the end of 1907, it alone holds half of the world's visible stock, and the price barely exceeds 6 cents. In other words, it bought a mountain of coffee to push prices up, and prices did not rise.

Sielcken then hands the matter over to the Rothschilds of Paris and their associates. The plan is ratified by the Brazilian federal government in July 1908, and its content is worth setting out in detail, because a state commits itself there on every front at once:

• a loan of 75 million dollars;
• a surtax of 5 gold francs, or 96 ¼ cents, on every bag exported, to pay the costs of the operation;
• an export ceiling of 10 million bags for 1907-1908, then 10.5 million for 1909-1910;
• a law penalizing any new coffee planting;
• and a committee of seven men in charge of selling off the stock, on which sit Sielcken, Edouard Bunge of Antwerp, Theodor Wille of Hamburg, the Société Générale and Baron Bruno Schroeder of London.

Their mandate is written in black and white: to sell “at prices that do not disturb the price of other coffees.” A whole country had just entrusted its crop to seven people, none of whom was Brazilian.

Ukers 1922, ch. XXXI, pp. 780-782 (print); ch. XXXV, pp. 806-807, 810-811; LC ch. 11

The committee absolutely refuses to deliver valorized coffee on the exchanges. Delivering this coffee on the exchange would put it back into the circuit that makes the price, and thus undo the operation.

The method varies by continent. In Europe, it puts the coffee up for auction and buys it back itself when it does not sell, which spares it from endorsing a low price. In America, it sells it only to buyers who commit in writing not to deliver it to the New York Coffee Exchange.

The result is out of all proportion to the real imbalance. Over five seasons, the world produces nearly 90 million bags, and consumption exceeds production by only 4 million. And yet the price doubles in two years: 13 cents at the end of 1911, 16 cents in 1911 at the peak, a rise of about ten dollars per bag between 1904 and 1911.

Washington ends up getting involved. Senator Norris of Nebraska puts the cost to the American consumer at 35 million dollars a year. On May 18, 1912, the federal government sues Sielcken, Schroeder, Bunge, Wille, the Société Générale and the New York Dock Co. for conspiracy in restraint of trade. It asks for the 746,539 bags stored in the United States to be placed under receivership.

Justice does not follow. The injunction is refused, the stock is sold to eighty green coffee traders in thirty-three cities before April 1^st, 1913, and the complaint is dropped in May 1913. Congress decides otherwise: the Norris Act of February 1913 bans any American participation in a future valorization.

Two dates close the episode. The 1908 loan is fully repaid in 1919. The surtax of 5 francs, promised as temporary, is still in force in 1922.

Ukers 1922, ch. XXXV, pp. 807-812 (print); Hughes committee 1909 cited p. 515

Ukers, writing in 1922, judges the principle “economically unsound, because it encourages overproduction.” A price held by a public buyer tells the planter to plant again, and the next crop makes the support heavier to finance. He moreover attributes the success of the operation to a fortuitous combination: small crops, Sielcken's genius, and the war.

Brazil nonetheless starts again. São Paulo buys about 3 million bags in early 1918; after the frost of June 1918, these stocks briefly show 60 million dollars of capital gain. A new campaign follows in 1921-1922, with a federal loan of 9 million pounds sterling placed in London and New York in May 1922, secured by 4,535,000 bags.

Next come the Permanent Defense of the 1920s, then the crash of 1929. Coffee then accounts for more than half the value of Brazilian exports: when its price falls, the whole country loses its revenue. Brazil turns to outright destruction.

From 1931 to 1944, the Departamento Nacional do Café, financed by an export tax of 2.40 dollars per bag, burns or submerges 78.2 million bags of exportable coffee. That is 10.3 billion pounds. That is also 12% of the annual stock in 1931, and 70% in 1937.

The word valorization has disappeared. The logic does not budge: withdraw the supply to hold the price. It is the one the International Agreement will take up again.

Ukers 1922, ch. XXXV, pp. 804, 813-818 (print); ch. XXXIII, p. 468; Daily Coffee News, Sept. 22, 2021, after Time and the CEPEA/ESALQ series, accessed Sept. 7, 2026

The war brings the American state into the coffee trade. On January 31, 1918, President Wilson places all green coffee traders under license.

Hoover's Food Administration then regulates everything that can be regulated. It sets a maximum price of 8 ½ cents for the spot month, that is, the nearest delivery. It adds 15 points of carry per month, an allowance authorized for each month of waiting. It limits stocks to ninety days, caps profits on actual cost and bans resales.

Hoover also fights on another front. The Shipping Board wanted to classify coffee outside the food commodities; coffee would then have lost its rank in the allocation of tonnage, hence its place in the holds. Hoover forces through, against it, a tonnage guaranteeing 1,500,000 bags of visible stock.

Then the weather settles the question in place of the regulations. At the end of June 1918, a real frost strikes São Paulo. The market takes it for the usual seasonal rumor.

It will end up believing it, late and all at once. Santos 4s, at 8 ¼ cents in May, quote 20 ½ cents on December 10. The control is lifted on December 5, and the exchange reopens on December 26 at 17 ½ cents.

In March-April 1919, the market that had refused to buy at 10-12 cents bids at 20-22 cents. In June 1919, the July contract beats the 1887 record, at 24.65 cents. Then the deflation of 1920 drops coffee “well below its intrinsic value.”

Ukers concludes that price control had nothing to do with it. The frost and the indifference of buyers had been enough.

Ukers 1922, ch. XXXV, pp. 813-818 (print); p. 800 for the 1919 record